Option-based valuation of mortgage-backed securities

Ekonomski Anali

关键词: mortgage-backed security(MBS);    prepayment;    default;    bivariate binomial pricing technique;   

DOI  :  10.2298/EKA1086042M

来源: DOAJ

【 摘 要 】

Pure econometric approaches to pricing mortgage-backed securities (MBSs) -principal pricing vehicles used by financial practitioners - fail to capturetheir true risks. This point was powerfully driven home by the globalfinancial crisis. Since prior to the crisis default rates of MBSs were quitemodest, econometric pricing models systematically underestimated thepossibility of default. As a result, MBSs were severely overvalued. It iswidely believed that the global crisis was largely triggered by incorrectvaluation of mortgage-backed securities. In the aftermath, it is important torevisit the foundations for pricing MBSs and to pay much closer attention todefault risk. This paper introduces a comprehensive model for valuation offixed-rate pass-through mortgagebacked securities in a simple option-basedframework. In the model, we use bivariate binomial tree approach tosimultaneously model prepayment and default options. Our simulation resultsdemonstrate that the proposed model has sufficient flexibility to capture thetwo principal risks.

【 授权许可】

Unknown